Selecting a Bank to Finance Your Business Acquisition

IBA is unique in the Pacific Northwest for the broad range of sale prices in the transactions professionally facilitated by our firm on a regular basis.  Many business brokerage firms focus on main street transactions, a fewer number of firms facilitate transactions in the “middle market”, and an even smaller number of business brokerage firms have the knowledge, experience, and ability to professionally represent business owners in the sale of companies in the world where investment bankers are the dominant deal brokers.  IBA’s talented & deep staff of business brokers successfully facilitated transactions with values from $250,000 to $11,500,00 in the first quarter of 2018.  The diverse & large group of businesses sold by IBA (4000+ completed transactions in Washington, Oregon, & Alaska) provides our firm with an unique perspective on which banks are successfully financing business acquisition deals and which characteristics separate the best business bankers from their peers. The following article is provided to assist business buyers with banker selection to finance their business acquisitions.

The most important attributes in the selection of a banker to work with on securing a business acquisition loan are knowledge & experience.  Business acquisition loans are one of the most sophisticated loan products offered by banks.  One of the reasons for their sophistication is that they are often financing the acquisition of intangible assets including the customer base, reputation, and market share of a company.   These assets can have significant value.  Employing an example of a publicly traded company, think about Google.  Google is a company that touches a significant number of Americans every day and is highly profitable.  However, from a lending perspective what are the assets of the company that could be sold by a bank in a liquidation sale if the business model should fail to address a loan on the balance sheet of the company.  The naturally inclination of a bank is to lend against tangible assets (real estate, equipment, etc.)  The risk exposure of a bank increases dramatically when a majority of the loan is for the acquisition of intangible assets (often called “Blue Sky”).  Loans are readily available for the acquisition of these assets, but to successfully navigate the loan approval & funding process a business buyer needs knowledge about the regularly changing landscape of regulations & underwriting processes originating from inside the bank and externally from government entities that support entrepreneurship like the SBA (Small Business Administration) & USDA (United States Department of Agriculture).   The best way to navigate this labyrinth is to engage an experienced banker.  The most difficult activity for a business buyer is to find a quality business to purchase.   This search can take months or years depending on the industry and geographic location of the desired acquisition.   The second most difficult activity related to acquiring a business is often obtaining the financing necessary to complete the acquisition.   Unfortunately, I have seen motivated buyers lose desired business acquisitions by hitching their wagons to the wrong banker or bank.  I sadly recall one entrepreneur acquiring a school who lost his acquisition because his banker was unable to honor lending policy terms from a prior year when a transaction rolled over into the next calendar year and the bank changed underwriting policies.   I have also witnessed experienced bankers numerous times fighting for their clients and getting loans approved by being their advocates internally at their banks and through successfully facilitating exceptions to underwriting policies when the preliminary answer was no by the parties controlling the acquisition capital.   These bankers earned our admiration & respect at IBA and the appreciation of the parties involved in the transactions.

A close third behind experience & knowledge as a criterion for selection of a business banker to work with on the acquisition of a privately held company or family business is superior customer service.   The path to funding a business acquisition loan is a familiar process to an experienced & knowledgeable business banker requiring specific information regarding the business & borrower, executed bank originated documentation for underwriting ranging from subordination agreements to forms that need to be filed with the government entities, a business plan for post-acquisition, a site visit, and often life insurance.   It is generally a new process to the business borrower seeking the loan.  The best business bankers wear numerous customer service hats ranging from teacher to deal shepherd insuring the loan is progressing at the necessary pace to achieve a targeted date for completion of a transaction and are readily available to answer questions and support the transaction.  Nothing frustrates the parties involved in a business purchase & sale transaction more than being ready to complete the deal and having to wait weeks or months for a bank to deliver the funds.  I recall one business buyer regretting his bank selection post completed transaction because they overpromised and underdelivered on their anticipated funding date costing him over six figures in profit in the first year of acquisition due to the seasonality of the business model.  It is recommended that a business banker is selected who is patient, available, and has strong communication skills.

Individuals with the experience & knowledge necessary to successfully facilitate business acquisition loans are some the most coveted employees in the banking industry.   They are often recruited away from one bank by another like high priced free agents in professional sports.  Sometimes their migration is motivated by a specific bank’s underwriting processes that will facilitate the ability to finance more deals other times it is motivated by the ability to offer better interest rates or terms to clients in the marketplace.   It is IBA’s policy to refer quality professionals in the banking industry rather than specific banks.   To use a baseball analogy, we would rather bet on a #1 starter to win the game than a team in general.  A true #1 starter is the rarest commodity in baseball.   A superior business banker is equally rare.  Recognizing that IBA only refers experienced, knowledgeable business bankers that provide superior customer service it is recommended that a business buyer seeking acquisition financing shop their loan to multiple bankers.   Interest rates, origination fees, funding time periods, and underwriting polices can vary significantly between banks.  A business buyer should never forget that they are the bank’s customer and that they have choices in the marketplace regarding who they work with as a financial institution.  Another consideration in bank selection should be whether a borrower desires a main street banking relationship with their lender for services ranging from merchant service to making deposits and obtaining change.  There are times as an entrepreneur when it is desirable to be able to walk into a branch and talk to an individual in person.  There are other times when a small business bank without a retail presence is the best option to finance a business acquisition.

IBA maintains a vetted, referral database of professionals serving the entrepreneurial marketplace in the Pacific Northwest.  We welcome the opportunity to be a resource to the small business community.  If you are seeking a business banker to support an acquisition, a business attorney, CPA, or wealth adviser to assist you with asset management post transaction please contact us and we can provide you with the names of some quality individuals to interview.

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, and mergers & acquisitions community on subjects relevant to the purchase & sale of privately held companies and family owned businesses.  IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.